The Telecom Prospectors Stake Out Brazil

Telebras' privatization will make the society more productive

It's a telecom gold rush. Global heavy hitters from Sprint to France Telecom and Spain's Telefonica are lining up as prospective bidders for Brazilian phone giant Telebras. In Latin America's biggest-ever privatization, it will go on the block in 12 parts in an auction scheduled for July 29. Winners are expected to pay well over the $11.6 billion minimum price and spend billions more to expand Brazil's market from today's 17 million phone lines to 40 million in five years. And a second phalanx of major investors--suppliers of telecom equipment and services from transmitters to software--is also piling into Brazil.

Vast changes triggered by the onslaught are likely to ripple through Brazil's society, making it more productive and competitive. After the auction, buyers will have to pour capital and new technology into three fixed-line systems, the international long-distance carrier, and eight cellular companies that will be up for sale. The result will be "a fundamental boost for the entire business community," says Alexandre Gartner, telecom analyst for Rio de Janeiro investment bank Bozano Simonsen.

LEAPFROG. Consumers' expectations for other products and services will rise, too, analysts predict, as lines multiply and technology leapfrogs from the 1950s to the next millennium. "A lot of Brazilians think it's normal that phones, electricity, and water often don't work," says Carlos de Paiva Lopes, chairman of Swedish giant L.M. Ericsson's Brazilian unit. "Once they get a taste of better phone service, they will demand more from all services." With millions of new lines, the Internet will quickly become part of Brazilian sales and marketing strategies. Telemarketing will likely explode. And the benefits of the privatization will spread broadly: Public schools that don't even have phone lines now will be able to hook up to the Internet as a learning tool.

The Telebras auction could be delayed, but not for long, by bidders' pleas for more time to study the huge cache of data on its operations opened by the government last month. President Fernando Henrique Cardoso, who is favored to win a second term in next October's presidential elections, wants to sell the company before the campaign heats up. Workers' Party candidate Luis Inacio Lula da Silva has already charged that the government is "giving away" Telebras.

Meantime, the benefits of increased competition are already showing up. In Brasilia, the price of a cellular phone has dropped from about $650 to $350 since a group led by Bell Canada bought the capital's cellular B-band system just a year ago. By the end of this year, state-of-the-art digital technology will be used in 60% of all new cellular lines, compared with just 2% in 1997.

FAST TRACK. There's more to come as investment increases. Motorola Inc., for example, has spent $100 million on a complex in Sao Paulo state to make equipment such as cellular phones and plans to invest $200 million more. Lucent Technologies Inc. began producing radio-based stations in March as part of a $100 million investment, and Northern Telecom Ltd. started up a plant on June 1 to construct digital cellular systems. Nor is it only multinationals that are riding the boom. Zeke Wimert, president of Unitools do Brasil, a local software and Internet solutions provider, says dozens of small businesses, including his, are scrambling to win lucrative contracts with the telecom giants. "Our hope is to make a lot of money from the market opening," Wimert says.

But there are risks in the sell-off. Although Telebras American depositary receipts are the most actively traded foreign shares on the New York Stock Exchange, investors who have already turned sour on emerging markets could become even warier of Brazil if the prices paid in the auction are disappointing. Still, the sale will put Brazil on a fast track toward modernization. To avoid the two-year wait for a line from Telebras, Brazilians now pay $1,500 to buy one from a reseller. Within three years, the price could drop to $50 and the wait to a couple of weeks. That might not compare favorably to the U.S. and Europe. But for Brazilians, it will be a revolution.

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